5 reasons why Amazon may never release a smartphone

Mike Dano

According to a new report from DigiTimes, Amazon (NASDAQ:AMZN) plans to release a 4.7-inch smartphone in the second quarter of this year. The company was considering a 4.3-inch screen phone, according to the report, but decided to go with a bigger one due to increasing consumer demand for giant phones.

Although DigiTimes has a mixed track record in the rumor department, the publication is by no means the first to tip the imminent release of an Amazon smartphone. A New York Times post in 2010 indicated Amazon was considering a smartphone. Topeka Capital Markets analyst Brian White wrote last year that Amazon would release a smartphone by the end of 2012, a rumor bolstered by a Bloomberg report in July 2012 of an impending Amazon smartphone. And The Verge "confirmed" the Amazon smartphone in a Sept. 5, 2012, article, and noted the gadget "could be announced tomorrow."

Now, to be clear, an Amazon smartphone could well be announced tomorrow. I really don't know. I have no insider insight into the company. But what I do know is that Amazon has very little chance of being successful in the smartphone market, if it does decide to enter the business. Here are five reasons Amazon would do well to let the rumors of an Amazon smartphone remain just that:

1. The smartphone market is not easy.

"It's a bad business that's very difficult to succeed in," noted Jonathan Chaplin of New Street Research. "It's a business that requires massive amounts of capital and R&D."

It's a well-documented fact that Samsung Electronics and Apple (NASDAQ:AAPL) are the only two really profitable smartphone makers in the world. Dozens of other smartphone makers, including top-tier ones--think LG Electronics, HTC, Nokia (NYSE:NOK), BlackBerry (NASDAQ:BBRY) and Sony Mobile Communications--are either struggling or just drawing even. Even Chinese manufacturers, which would presumably benefit from lower production costs, are reporting sluggish handset sales.

It's not impossible to break into the smartphone market and become successful--Apple managed to do just that starting in 2007--but the odds are not good (just ask Hewlett-Packard, Dell, Sendo, Sierra Wireless… the list goes on).

2. Success in tablets does not pave the way for success in smartphones.

According to IDC, Amazon was the world's third largest tablet manufacturer in the fourth quarter of 2012 with 11.5 percent of the market, behind Samsung's 15.1 percent and Apple's 43.6 percent. It's an impressive showing for a company that primarily sells stuff on a website.

But the tablet market is only a few years old, which means that new entrants like Amazon have a better chance of making a mark. The smartphone industry is more than two decades old, and the battle lines are much more clearly drawn.

Further, tablets are not smartphones. Tablets are largely viewed as content consumption devices and can therefore leverage Amazon's strength in video (Amazon Instant Video) and books (Kindle). Smartphones are used for that and much more.

"A Kindle Fire and a smartphone are two very, very different devices," said Chaplin.

Finally, Amazon's Kindle Fire tablet may not be as successful as the company had hoped; Pacific Crest analyst Chad Bartley reportedly cut his estimate for fourth quarter Kindle Fire sales to 6 million units from 8 million units.

3. Internet and cloud services aren't enough

"The whole purpose of the (Amazon) tablet is to drive purchases at Amazon," explained ABI analyst Michael Morgan (a FierceWireless contributor). "If you're going to come to market with a smartphone that is a mechanism to sell Amazon stuff, how strong of a value proposition is that?"

Smartphones are primarily communication devices, an area in which Amazon has virtually no assets. While Amazon does offer entertainment content, it has no navigation services or messaging competence--although the company has managed to create a relatively vibrant app store.

"Why would I buy an Amazon phone when I could just get the app?" asked Morgan. "The smartphone is used for so much, to come in with just part of the equation is just not enough."

Chaplin noted that even Android, built by Internet services company Google (NASDAQ:GOOG), isn't directly designed to make money. Android is available for free to handset makers, and Google's ultimate goal is to create more outlets for its advertising business.

4. There are already too many smartphone platforms.

In just the past few months, Microsoft (NASDAQ:MSFT) began a major push for its Windows 8 and Windows Phone 8 platforms, BlackBerry released its new BlackBerry 10 platform and Firefox announced its HTML5-based mobile OS will soon go on sale in emerging markets across the globe. Add into this mix a possible Tizen phone from Samsung, Jolla's planned Sailfish phone and new versions of iOS and Android and you get a market filled with smartphone platforms.

Should Amazon add its own version of Android into this mix? The company famously broke from Google's Android development path with the Kindle, and Amazon presumably would continue on its own Android fork with a Kindle Fire smartphone. This means Amazon would need to battle for developer and ecosystem mindshare with the likes of Apple, BlackBerry, Google, Microsoft and others.

5. Smartphones are a global game, and Amazon might not have much luck expanding beyond the U.S. market.

A big part of Amazon's appeal is the content the company is able to offer. Amazon's Instant video service continues to expand with big-name programs and movies and exclusive content. But the licensing stipulations for much of that content likely restricts it to the U.S. market, which means that Amazon wouldn't be able to tackle international markets with the firepower it can levy domestically.

"The U.S. is their strong suit," Morgan said of Amazon. "So if they're going to launch, they're going to target the U.S. And that's incredibly difficult."

And if Amazon does decide to bring a smartphone to the U.S. market, it will face stiff competition on the low end from cheap Android smartphones and on the high end from products like the iPhone, the Samsung Galaxy S4 and the HTC One. Further, the strategies Amazon has employed to lower the cost of its Kindle Fire (specialized ads and inexpensive hardware) likely won't help the company much in a smartphone market where carrier subsidies reduce the upfront cost of most smartphones to $100-$200.

Does all this mean that Amazon definitely won't build a smartphone? I don't think so. The company clearly has its sights set on the consumer electronics market, because that's where the content business is moving to, and smartphones remain a dominant element there. But I think the company might be better served by solidifying its position in tablets (a market that could well grow into a rival of the smartphone market) rather than risking its reputation with consumers by releasing a smartphone. --Mike | +Mike Dano | @mikeddano

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